Welcome to the SWMAS Winter 2018-19 (Q3) South West Manufacturing Barometer. This report presents the voice of nearly 140 senior decision makers in UK SME manufacturing businesses.
Prompted by findings last quarter where manufacturers highlighted concerns for their supply chains and with still no clarity on the final shape of Brexit, this Barometer’s Special Focus asked manufacturers to convey what they are doing to develop and secure their supplier base. The findings chime with those predicting continued decline in future performance of the sector and demonstrate that manufacturers are clearly feeling the stresses of a very challenging economic and industrial landscape.
THE CORE TRENDS
Whilst the underlying determination and resilience of the sector is evident again this quarter responses suggest manufacturers remain under significant pressure over Brexit and the ongoing market uncertainty.
Compared to last quarter’s forward projections, we have seen a small recovery in the number of manufacturers anticipating profits and recruitment increases in the six months ahead. The greatest emphasis in this partial and somewhat surprising recovery is on recruitment, where 47% of manufacturers expect to take on more staff by mid-2019 – an increase of 12% on the previous quarter. Whilst this is looks like some good news amongst an otherwise gloomy outlook it masks a reduction on the same period last year across all four core trends with survey responses up on the previous quarter but down on the same period last year.
Nearly 90% of participants of the SWMAS Manufacturing Barometer are CEOs or directors so looking at their aspirations provides some unique insight. Many tell us they intend to focus on developing new products or services to help secure a new or broader customer base and drive sales with others making in investment in space to support their intentions to increase production capacity and improve efficiency.
However, looking back, no more than 49% of manufacturers have actually increased investment in their business over the last two years. This indicates that whilst there is a desire to invest, many continue to hold off, waiting for clarity on the future.
SPECIAL FOCUS: SECURING SUPPLY FOR BREXIT
Our previous survey was the first to indicate that many UK SME manufacturers are stockpiling as a means of managing Brexit uncertainty, an early indicator of what we have since seen reported in the media and other surveys. This finding came at the same time as strong indications that businesses across the sector were focusing on developing their relationships with existing suppliers. Therefore, this quarter’s Barometer questions set out to explore whether and how UK SME manufacturers are securing and developing their supplier base, particularly referencing suppliers of raw materials, components, subassemblies, and out-sourced finished goods production.
First, we looked at location of suppliers, and whether UK SME manufacturers intend to relocate any of their existing supply base. Nearly a quarter of respondents who currently source from the EU are considering buying those components or goods elsewhere - 16% of these said they intend to look for suppliers in the UK. A further 5% of those surveyed said supplies currently sourced from outside the EU could now be sourced in the UK.
This change indicates a significant demand on time, effort and resource as UK SME manufacturers identify new suppliers and establish relationships with them. It also suggests a vital opportunity for the domestic market and questions about the visibility, availability and capacity of the UK supply base. To illustrate this, comments from respondents included, ‘We attempt to source in [the] UK where possible. Where this is not possible
due to quality or availability we will source [from] wherever commercially viable’ and ‘…we try to buy at the cheapest source and Brexit isn’t helping UK based companies be competitive in a global market’.
Other comments indicate that some markets may struggle finding UK suppliers – one respondent notes: ‘With [the supply of]…electrical components the UK base has shrunk to negligible size. This is unseen on statistics as much of the European goods [production was] moved to China with some then back to Eastern Europe’. Another said, ‘The challenge is to re-source to [a] UK supplier of aluminium extrusions that is capable and cost competitive.’
Those who rely on specialist manufacturers could have issues too: ‘We are not able to make decisions about supply chain as we are using very specialist small manufacturers and it is not easy to change…’
Returning to stockpiling, the SWMAS Manufacturing Barometer asked if UK SME manufacturers have specific intentions to significantly increase stocks in preparation for Brexit. The majority of respondents (over 70%) said they are prioritising the stockpiling of raw materials or bought-in components with sub-assemblies or part-finished items as a secondary priority (51%), and finished goods third on the priority list (nearly 50%).
Respondents noted that the top three challenges to their supplier base in the coming year are:
1. Volatility of customer demand;
2. Matching or reducing purchase costs; and
3. Developing relationships with existing suppliers
Despite the continued uncertainty as we head into the final weeks before the originally scheduled Brexit date, and the recent knocks to the automotive industry, the UK’s SME manufacturers maintain the pragmatic outlook that has become a notable feature of respondents to the Manufacturing Barometer. However, our data shows that over 50% of manufacturers are finding it difficult to increase profits and are holding back on investment and recruitment. As seen in the performance figures over the last two years, Brexit is amplifying the pressures manufacturers have to manage. This latest Manufacturing Barometer also shows that the challenges of securing the supplier base and the weight of addressing stock considerations will divert valuable resources in a sector acknowledged to contribute significantly to the economy.
There is an opportunity for the UK to capitalise on the supply needs of manufacturers looking to relocate their supplier base to domestic turf. However, we may miss this opportunity if we don’t have the desperately needed clarity over Brexit, and we are calling for resources to be made available to help manufacturers who are already consumed by coping with the ongoing uncertainty.
Download the full Winter 2018-19 Q3 South West Manufacturing Barometer report: